orissa state financial corporation Management discussions

ORISSA STATE FINANCIAL CORPORATION ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS NATIONAL ECONOMIC SCENARIO: The price stability and steady growth were major challenges of National Economy during FY 2011-12. As per the advance estimate released by Central Statistical Office (CSO), the Indian economy is expected to register growth rate of 6.9 percent during 2011-12. The inflation as measured by the Wholesale Price Index (WPI) was high during most part of the year. Monetary policy was tightened by RBI, so as to control inflation during the year. The growth is estimated to be 2.5 percent in agriculture, 9.4 percent in service sector. Dip in growth of industries to 3.9 percent during 2011-12, led to slowdown in growth of Gross Domestic Product (GDP). The growth in consumption expenditure, gross fixed capital formation, export and import works out to 6 percent, 5.6 percent, 14.3 percent and 17.5 percent respectively for the year 2011-12. The year also witnessed sharp increase in interest rate which has resulted in high cost of borrowing thereby affecting credit off take and profitability. As per the estimate of CSO, the Growth in Domestic Savings (GDS) as a ratio of GDP in the current market price declined from 33.8 percent in 2009-10 to 32.3 percent in 2010-11. Reduction in corporate investment is attributed to slow down in global economy as well as increase in cost of borrowing followed by rising of interest rates in order to control inflation in domestic front. Fixed investment as a ratio of GDP declined from 31.6 percent in 2009-10 to 30.4 percent in 2010-11. The savings - investment gap narrowed both in public as well as in private Sectors in 2010-11. The sectoral composition of GDP as assessed by CSO during F Y 2011-12 stood at 13.9 percent, 27 percent and 59 percent for agriculture, Industries and Service Sector respectively. The share of service sector in Indias GDP in current prices increased from 55.1 percent attributing to inflation during the year which includes higher prices of vegetables, egg, meat and fish, increase in global commodity prices and persistent hike in International crude & petroleum products. Despite difficult condition in global economy, export continued to be robust in the year registering a growth rate of 40.3 percent as against 22.7 percent in the previous year. During 2011-12, the merchandise export was $150.9 billion in first half of the year, which is 40 percent increase over the corresponding period of 2010-11. Similarly import stood at $236.7 billion during April - Sept 2011 which recorded an increase of 34.3 percent over the corresponding period of 2010. The foreign exchange reserve increased from $ 279.1 billion by end of March 2010 to $ 364.8 billion by end of March 2011. STATE ECONOMY As per the quick estimate, the real growth rate of Odishas economy during FY 2010-11 stood at 8.6 percent at 2004-05 prices. The real growth rate of the state exceeded the national growth rate for five years except FY 2009- 10. The state economy continues to grow at a rate higher than the national average over a long period of time which is desirable to improve Odishas standard of living compared to the national average. The states real per capita NSDP for the year 2010-11 was Rs.25,708 and it is expected to be Rs.26,900 in 2011-12 at 2004-05 prices. As per the advance estimate of GSDP for the year 2011-12, the Industry Sector represents 26.20 per cent of the state GSDP followed by Service Sector which is 57.34 per cent and Agriculture accounts for 16.46 percent. By the end of 2010-11, the State Government had signed 89 MoUs with various industrial houses with a total estimated investment of Rs.4,61,182 crore. Out of these, 33 projects have gone into partial production and have generated employment for 80,561 persons and other projects are under various stages of implementation. Out of 89 MoUs signed by the State Government, 50 projects are from various steel promoters. Out of 50 steel projects, 30 projects have started partial production with an investment of Rs.50,325.77 crore and provided direct and indirect employment of 21617 and 52446 respectively. The large and mega projects have created immense opportunity for growth of ancillary and downstream enterprises in the MSME sector. During 2011-12, 4648 enterprises in MSME sector have gone into production with an investment of Rs.410.89 crore generating employment opportunity for 25413 persons till Feb2012. The Director of Industries is the nodal agency for promotion of Micro, Small & Medium Enterprises (MSMEs) in the State both in identifying and assisting the prospective entrepreneurs. Several policy initiatives have been undertaken by the Government of Odisha for promotion of industry in the state which inter-alia includes, Odisha Industrial Policy Resolutions, 2007, MSME Development Policy, 2009, Single Window concept, Public Private Partnership, MoU of State PSUs with their administrative departments, categorization of PSUs, Social Safety net project and Audit of PSUs. Advance to MSME sector by the Banks under Annual Credit Plan 2011-12 in the state stood at Rs.13795.38 crore which constitute 19.88 percent of the total advance. Government of Odisha has created a new MSME Department with a view to promote, develop and enhance competitiveness among MSMEs. It has also created favourable environment and innovative means to support MSMEs. New Food Processing Policy and State Export Policy have been prepared. The department is implementing national mission for food processing industries. In terms of notification dt.19.12.2011 of G.A Department of Government of Odisha, the Corporation has been placed under the administrative control of MSME Department. VISION AND MISSION OF OSFC Vision * Emerge as a single-window for meeting the financial and developmental needs of MSME sectors in the State to make it strong, vibrant and competitive both nationally and internationally. * OSFC brand as a Customer friendly institution. * Provide efficient cost effective services to the customer through application of modern technology and good governance. Mission Empower MSME sector with a view to contribute to the process of economic growth, employment generation, creation of successful entrepreneur and balanced regional development. OSFC : ITS RELEVANCE & PROSPECTS OSFC, established in the year 1956, has played a pivotal role in extending credit support and financial services to first generation entrepreneurs to set up MSMEs in the State and thereby ushered in an era of industrialization in the State. It has completed more than five decades of dedicated service in financing MSMEs and has contributed to the process of economic development of the State in terms of value addition, employment generation, dispersal of industries, mobilization of capital, entrepreneurship, skill development and export earnings. Due to structural changes in the economy, many of the MSMEs in the State could not cope up with increasing competition and gradually became sick. This adversely affected the financial health of OSFC. The financial health of the Corporation steadily deteriorated futher due to poor recovery, rising NPAs and stringent provisioning as per RBI norms. In the past, OSFC raised high cost fund to repay low cost borrowings on maturity due to low recovery and fell in to a debt trap. The lending activities of OSFC declined and ultimately stopped since 2005-06. Now OSFC is on revival path, restructured and rejuvenated mainly with active support from the State Government besides support of other stakeholders like SIDBI, IDBI & Banks. OSFC has resumed its lending activities from March 2010 and is striving for an early turn-around. OSFC has also played a key role in revival of potentially viable sick units by providing fund and non-fund based assistance along with reliefs and concessions. This is one area where banks are particularly reluctant to step in, because of their NPA status. OSFC would continue to play its role in the rehabilitation of sick units of the State and looks forward to the support of the State Government in this regard. After resumption of lending, OSFC is facing keen competition from the banks, FIs and private players in terms of cost of funds, availability of resources and credit pricing. Most of its good and proven customers have migrated to banks and other FIs, as OSFC was out of business of lending for almost six years. However, the strength of OSFC lies in its network of Branches, experienced manpower and commitment to the cause of MSMEs. During the year, the Corporation has taken several measures in continuation of previous year, to remove bottom-line deficiencies covering Policy, Procedure, Practice, Computerisation, Manpower motivation, Orientation & Staff Accountability with a view to position itself as a professional financial institution in the competitive environment. OSFC has revisited, modified and firmed up its policies and practices and streamlined its procedures as per best banking norms and practices. Apart from meeting the term loan requirements of an industrial unit, OSFC has made tie up arrangement with Union Bank of India to facilitate sanction of working capital. The Corporation has adopted interest rate structure ranging from 13.50% to 15.50% which is competitive in the prevailing market scenario with provision of rebate of 0.50% for prompt payment to encourage borrowers. While adapting itself to the fast changing business environment, the Corporation has focused on strengthening customer satisfaction through prompt & quality service. The Corporation would continue to identify areas of business opportunity; scale-up and broad base its business for sustained earnings. The Corporation is fully geared to enhance lending activities and has set a loan sanction target of Rs.35.00 crore for the first half of FY 2012-13 despite the following constraints: * Non availability of refinance support from SIDBI. * Recovery of loan dues mostly from NPA portfolio remains the only source of fund for the Corporation to meet its establishment expenses and to continue with the lending activity. * CGTMSE coverage for extension of collateral free credit facility to eligible MSMEs is not available to the Corporation. * The corporation provides credit facility by way of term loan only. Improved financial position of OSFC in terms of sustained profit, growth in net worth to Rs.18.91 crore and capital adequacy to 9.50 % would propel the Corporation for better performance in coming years. The wave of industrialization sweeping the State due to destination of several mega projects opens up large opportunities for setting up ancillary/ downstream industries. OSFC is looking forward to finance such industries to fulfill the aspirations of young entrepreneurs of the State. OPERATIONAL HIGHLIGHTS SANCTION The Corporation remained away from the business of lending for almost six years. Consequently, most of the good customers of the Corporation migrated to other banks & FIs. Loan Policy for FY 2010-11 which laid emphasis on finance to standard units only did not yield satisfactory response. Loan Policy for FY 2011-12 also failed to attract the old customers as the corporation is providing only Term Loan assistance whereas Commercial Banks are providing both Term Loan and Working Capital. The Corporation could sanction Rs.4.11 crore only to 8 units during the year 2011-12. Market penetration within a very short period after a gap of 6 years has been extremely tough and challenging. As on 31.03.2012, the cumulative sanction after resumption of lending in March 2010 stood at Rs.8.98 crore to 16 units. CONSORTIUM / JOINT FINANCE OSFC has initiated the process of joint financing with SIDBI/Commercial Banks for diversification of risk. All joint finance cases shall be governed by the terms and conditions, credit norms and modalities contained in respect of joint finance agreement. The participating lenders shall have pari-passu charge over the assets of the borrowers unit. The Corporation has entered into a tie-up arrangement with Union Bank of India for consortium financing / financing of Working Capital to OSFC assisted units. RISK MANAGEMENT AND CREDIT RATING The Corporation has adopted two risk rating models for new projects and existing projects which evaluate all conceivable risks as per risk rating models. The models are drawn up in a structured manner incorporating financial analysis, projections and sensitivity, financial risk, industrial risk, management risk, business risk etc. It has also prescribed certain level of standard or initial parameters beyond which no proposal shall be entertained. It also lays down minimum rating below which no credit exposure would be undertaken. However, in order to expedite and standardize the process of appraisal and risk rating of credit proposals in a more rational and objective manner, the Corporation has adopted Credit Appraisal & Rating Tool (CART) software of SIDBI for credit exposure up to Rs.100.00 lakh. On successful operationalisation, the same software would be used for other cases. Inhouse risk rating models is being used to risk rate credit proposals involving credit in excess of Rs.100.00 lakh and green field projects. PRIVILEGED CUSTOMER SCHEME (PCS) The Corporation intends to incentivize well performing units of OSFC having good repayment track records for last 3 years with the Corporation/Banks/FIs. The Scheme provides credit on softer term to such borrowers to meet their non-project specific business requirements, under permissible annual limit. The loan under this Scheme shall be guided by the following: * Interest rate applicable as per risk rating, * Interest rebate of 0.5% for prompt payment, * Minimum 150% overall asset coverage, * Positive net worth and no accumulated loss, * Loan limit - Rs.50.00 lakh maximum. FAIR PRACTICES CODE The Corporation is following Fair Practice Code for lenders as per RBI guidelines. The guidelines for processing loan application; appraisal, disbursement, post-disbursement supervision, and credit monitoring have been laid down. All the information relating to charges/fees for processing has been disclosed in the application form. The facility for prepayment of loans is also available. KNOW YOUR CUSTOMER (KYC) & ANTI MONEY LAUNDERING (AML) STANDARDS As advised by SIDBI, the Corporation has put in place a proper policy frame work on KNOW YOUR CUSTOMER and ANTI MONEY LAUNDERING STANDARDS. Detailed Customer Acceptance Policy, Customer Identification Procedures, Monitoring of Transactions and Risk Management Procedures have been laid down under KYC norms. The guidelines are issued with an aim to develop and evolve a robust system to prevent abuse of financial institutions for combating financing terrorism. The objective of this policy is to prevent OSFC from being used intentionally or unintentionally by criminal elements for money laundering activities. The KYC procedure enables to understand the customer and their financial dealings which in turn help the Corporation to manage the risk prudently. A policy for identification of high value cash transactions and suspicious transactions and monitoring thereof have been laid down under AML policy. One senior officer has been designated as Principal Officer, who in turn is responsible for monitoring and implementation of KYC norms and AML standards. FEE BASED ACTIVITIES The following fee based activities were undertaken during the year:- * General Insurance Business * Preparation of Project Profiles * Training Support for Entrepreneurship Development GENERAL INSURANCE BUSINESS The Corporation continued to market General Insurance products of The New India Assurance Company Ltd. and posted modest growth in this area during the year. The Corporation has also lined up with Life Insurance Corporation of India (LIC) to market life insurance products. PREPARATION OF PROJECT PROFILES The Corporation continues to prepare project profiles for MSMEs at affordable rates. During FY 2011-12, the Corporation has prepared 107 nos. of project profiles for different clients. DISBURSEMENT The Corporation disbursed a modest amount of Rs.0.84 crore during the year to 6 units. BUSINESS INITIATIVES The Corporation has taken following new initiatives to increase loan portfolios: * Effective steps to reduce the response time for a systematic and quick credit delivery process so as to continue with its business programme in this highly competitive environment. * Formulated the Technology Up-gradation Scheme as per MSME Development Policy- 2009 which is under consideration of the State Government. * Customer meets are being organised at Branches to have a direct interaction with both existing and prospective borrowers with an aim not only to understand and redress their problems to the extent possible but also guiding the enterprises in availing opportunity for expansion/ modernization/ up-gradation/diversification of their projects and establishment of new projects. * Seminars are also being organised for disseminating information with regard to scope for establishment of new projects in various emerging sectors and the details of Loan Policy and OTS Policy. * Put in place a comprehensive Loan Recovery Policy wherein Post Disbursement Monitoring and NPA Monitoring & Management have been emphasized particularly prevention of slippage of standard accounts and up- gradation of NPA accounts. * Took active participation in the celebration of 8th Entrepreneurship Week (5-11 March 2012) organized by the State Government throughout the State. STEPS TAKEN FOR OVERALL IMPROVEMENT OF WORKING ENVIRONMENT * Initiated measures to improve the overall image of the Corporation through timely service to the borrowers through issue of demand notices, balance confirmation certificates, acknowledgement of debts, responding to the difficulties of the borrowers. * Policy and procedures are being revisited and modification are being taken-up, wherever felt necessary, including adoption of new policies for timely follow-up and monitoring as well as for overall improvement in the working of the corporation with an aim to continue with the business activities in a more organized and systematic manner keeping with prudential norms and competitive environment. * Reconstitution of Executive Committee, Audit Committee and Disposal and Default Advisory Committee (DDAC) and internal Committees like Finance, Recovery and HR for assisting the CEO for day to day functioning of the Corporation. * Modifications of present Internal Audit policies and practices of OSFC. * Review of compliance to Audit observations by the Audit Committee in a regular manner and more particularly in the context of recovery of dues from assisted units. * Adoption of SARFAESI Act, 2002 to supplement the recovery avenues of the Corporation. * Instituting review and monitoring mechanism at regular intervals at different levels, major thrust on constant follow-up and monitoring including adoption of a comprehensive Loan Recovery Policy. * Launching of One Time Settlement Policy i.e, OTS-2011 Policy for a hassle free recovery of dues from hard core NPA accounts. * Adoption of a comprehensive Document Management Policy. * Modification in the Rephasement Policy. * Introduction of Staff Accountability Policy. * Felicitated 13 numbers of our valuable customers during Independence Day in recognizing their entrepreneurship and loyalty to OSFC. BUSINESS REVIEW MEETINGS Business Review Meetings were held at regular intervals with Branch Managers and Heads of Departments to review performance of the Branches and identify weak areas for improvement. The review of operations of the Branch was done in the presence of the Chairman and Managing Director of the Corporation. one of such meetings were attended by the Principal Secretary/Commissioner-cum-Secretary to Government, Industries Department, Government of Odisha. Weekly meeting of HoDs & Adopting Officers were held with MD to review the policy/procedures & business related matters. RECOVERY Recovery continues to be the prime activity of the Corporation to achieve twin objectives of reduction of NPAs and mobilization of resources. Further, NPA management has assumed greater significance for real turnaround of the Corporation. This includes credit monitoring and timely follow up of application of various recovery tools including initiation of legal proceedings and settlement through OTS etc. However, recovery is adversely affected due to several factors which are mostly beyond the control of the Corporation. In spite of relentless efforts like thorough scrutinization of the available security and prescribing the most appropriate exit route such as Close monitoring & follow up, Restructuring, Rehabilitation, Mutual Transfer, OTS, Seizure & sale, Legal action u/s 31/DRT/SARFAESI Act and Write off, the Corporation could be able to achieve recovery to the tune of Rs.36.55 Cr against a MoU target of Rs.40 crore during FY 11-12. The main reasons for decline in recovery are as follows: * Highly contaminated loan portfolios. * Existing portfolio not backed by adequate security. * Prolonged delay in vacation of stay/restrain order from Courts. * Slow disposal of seized assets due to obsolescence of technology, locational disadvantages, levy of taxes/arrear statutory dues. * Delay in payment of settlement amount under OTS schemes by most of the borrowers. During the year, the overall recovery of Rs.36.55 crore has become possible due to dedicated efforts of the employees of the Corporation and continuous monitoring by the management in spite of adverse conditions. After expiry of the MFD-OTS-07 scheme since 20.11.09, the Corporation was not able to offer an exit route to eligible borrowers to avail the benefit of OTS scheme. During the year an ongoing OTS scheme titled OTS-11 policy was launched by the Corporation and there has been moderate response. Corporation has approved 300 cases (out of 402 applications) under OTS-2011 scheme for a settlement amount of Rs.11.94 Cr. against outstanding of Rs.71.41 crore. In addition, borrowers were allowed to avail the benefit of earlier OTS schemes by paying the OTS & other dues by 31.03.12 as a last opportunity. The Recovery particulars of the year are shown in Table- 1. TABLE-1 Rs. crore Particulars Principal Interest Others Total Term Loan & Other Loans 21.33 14.38 0.14 35.85 Agency Loans 0.58 0.12 - 0.70 Recovery for the Year-Total 21.91 14.50 0.14 36.55 The percentage of net demand to loan outstanding (Principal) is 14.32% and the percentage of amount collected to recoverable is 2.38%. The Corporation has therefore, decided to streamline its procedures further and also to adopt new strategies for the purpose of making improvement on the recovery front. The position of Recovery for the year is given in Table - 2 TABLE - 2 Rs. crore Particulars Principal Interest Total Overdues at the beginning of the year 297.00 2347.09 2644.09 Add: Adjustment arising out of reconciliation 0.53 - 0.53 Less: Adjustment arising out of reconciliation 0.48 57.23 57.71 Sub Total 297.05 2289.86 2586.91 Add : Current Demand during the Year 4.52 234.69 239.21 Total Demand 301.57 2524.55 2826.12 Less Prin./Interest on account of loss assets & doubtful assets (iii) 151.60 1169.71 1321.31 Net Demand 149.97 1354.84 1504.81 Less i) Waiver through OTS - 94.44 94.44 ii) Recovery 25.61 14.38 39.99* Overdues at the end of the Year 276.10 2415.73 2691.83 Outstanding at the end of Year(31.03.12) 301.70 2415.73 2717.43 Percentage of recovery against net demand (Pri.) 14.32% Percentage of recovery against net demand (Int.) 1.06% Percentage of Recovery from recoverables 2.38% Percentage of net demand to loan O/s (Pri.) 49.70% * NOTE :1) Principal recovery include Rs.414.40 lakh adjusted out of recovery of interest in earlier years under OTS . 2) Recovery on Agency loans amounting Rs.0.70 crore have not been included. During FY 2011-12, 70 cases were seized U/s-29 involving loan outstanding of Rs.82.86 Cr. (Prin Rs.10.39 Cr.). 8 nos of DDAC meeting were held for sale of 75 cases including the cases seized in earlier years. 44 units were decided for sale at a total sale amount of Rs.5.70 Cr.(Prin O/s Rs.6.39 Cr.) out of which in 2 cases the sale was cancelled (sale amount Rs..0.08 cr.). During the year physical possession was given in respect of 42 cases having principal outstanding of Rs.7.21 crore. During the year under review, Corporation has disposed 94 cases of seized assets involving an outstanding of Rs.62.32 Cr. (Prin Rs.10.51 Cr.) through full materialization of sale and release to borrowers. Out of the 509 unsold assets 242 are industrial assets, 243 are collateral assets and 24 nos are transport/other cases. SEIZURE & SALE The Position of Seizure of units U/s-29 of SFCs Act and their disposal during FY 2011-12 is given in Table-3. TABLE - 3 Rs. Crore Particulars (U/s 29) 2011-12 No. O/s Amt. Pri. Int. Total Cases pending for disposal at the beginning of the year 533 45.80 322.34 368.14 Cases taken over u/s 29 during the year 70 10.39 72.47 82.86 Total 603 56.19 394.81 451.00 Cases disposed through DDAC 42 7.21 37.13 44.34 Cases released to original loanees including OTS cases 52 3.30 14.68 17.98 Total 94 10.51 51.81 62.32 Cases pending for disposal at the end of the year 509 45.68 343.00 388.68 including partly sold & sales pending for materialization. COURT CASES The position regarding section 29 cases is given in Table - 4. TABLE - 4 (Outstanding) Rs. crore Particulars No. Principal Pending at the beginning of the year 121 41.57 Filed during the year 38 81.03 Disposed of during the year 51 55.76 Pending for disposal at the end of the year 108 66.84 The Corporation usually takes recourse to section 31 when application of section 29 still leaves an unrealized amount against a units total outstanding or when for some reason or the other it is not possible for the Corporation to take action under section 29. Besides, the Corporation for recovery of its dues has filed cases under section 31 of SFCs Act and before DRT. Details in respect of cases filed by the Corporation under section 31 of the SFCs Act are given in Table -5. TABLE -5 Rs. crore Particulars (u/s 31) No. Amt. Pending at the beginning of the year 833 198.38 Filed during the year 14 18.09 Disposed of during the year 31 10.74 Pending for disposal at the end of the year 816 205.73 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). For recovery of its dues from the defaulters, the Corporation is taking action U/s 29 and 31 of SFCs Act, 1951 in addition to taking recourse to the provision of Recovery of Debts to Bank and Financial Institution Act 1993 (DRT Act). In the mean time, another Central Act namely Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 (SARFAESI Act) has come in to force with effect from 21.6.2002. The Corporation during FY 2011-12 has initiated action under the provisions of SARFAESI Act 2002 for recovery of the dues of the Corporation from defaulting units. FOLLOW-UP The follow-up visit is one of the effective tools for close monitoring of the units with a view to ensure proper end use of the funds, assess progress of projects to avoid time and cost overrun, mitigate constraints faced by the units. The follow-up inspection is being conducted during implementation of the project as well as during operation of the unit to ascertain health of the enterprise and ensure timely payment of dues. The case of incipient sickness is detected while conducting follow-up inspection and the Corporation is taking prompt remedial measures in close co-ordination with bankers for smooth running of enterprises. REVIVAL OF SICK UNITS The detailed position regarding identification and rehabilitation of sick industries is given in Table - 6. TABLE- 6 Particulars As on 31.03.2011 As on 31.03.2012 Identified as sick 1690 1690 Viability study completed 1687 1690 Prima-facie not viable including 1020 1023 cases approved under OTS Rehabilitation package approved - with additional loan 322 322 - without additional loan 345 345 Cases under study/BIFR Cases 3 Nil SUBSIDY The Corporation acts as an agent of the State Government for disbursement of Capital Investment Subsidy and Interest Subsidy. During the year under report, Rs.80.14 lakh and Rs.5.96 lakh was disbursed as Capital Investment Subsidy and Interest Subsidy to 21 and 14 units respectively. Joint inspection with DICs is carried out for release of Subsidy to eligible units as per procedural requirement. PROFITABILITY Net profit The Corporations net profit during the year 2011-12 stood at Rs.0.52 crore as against net profit of Rs.0.61 crore during 2010-11 reflecting a decline of 14.75%. The decrease in net profit during the year is on account of decrease in interest income and increase in personnel expenses. Net worth The net worth of the Corporation stood at Rs.18.91 crore as on 31.03.12 compared to Rs.16.57 crore as on 31.03.11 recording a growth of 14.12%. Capital Adequacy Ratio The Capital Adequacy Ratio stood at 9.50% as on 31.03.12 compared to 10.89% as on 31.03.11 against the benchmark of 9% set by SIDBI. FINANCIAL PERFORMANCE Income & Expenditure The Gross income earned by the Corporation during 2011-12 amounted to Rs.26.03 crore comprising of interest on loan and advance of Rs.14.38 crore which includes interest accrued on standard loan amounting to Rs.0.42 crore and other income of Rs.2.10 crore as against Rs.25.47 crore in 2010-11 registering increase of 2.20%. The personnel and administrative expenses, which were Rs.14.25 crore in 2010-11, has gone up to Rs.15.39 crore during 2011-12, registering increase by 8%. Total expenses has also increased to Rs.24.55 crore in 2011-12 from Rs.24.34 crore in 2010-11. After prior year adjustments net profit for the year 2011-12 is Rs.0.52 crore in comparison to Rs.0.61 crore of previous year. Profit & Loss position The Corporation has earned net profit consecutively for the 7th year and the net profit for the year under report is Rs.0.53 crore. The interest income decreased by Rs.1.57 crore (Rs.15.95 crore during the previous year to Rs.14.38 crore this year). Non-interest income increased by 10.91 % i.e. by Rs.0.20 crore (from Rs.1.90 crore during previous fiscal to Rs.2.10 crore this year). Personnel expenses have been increased from Rs.13.36 crore in 2010-11 to Rs.14.53 crore in 2011-12 i.e. raised by Rs.1.17 crore due to payment of regular increments in salary and allowances & payment of Rs.3.96 crore towards initial contribution to Group Gratuity Fund and on enhancement of Gratuity Payable Limit. Administrative expenses decreased by 3.38% i.e. by Rs.0.89 crore during 2010-11 to Rs.0.86 crore in 2011-12. Authorised and Paid-up Share Capital The authorized share capital of the Corporation stood at Rs.500 crore. SIDBI has agreed for conversion of Loan in Lieu of Share Capital of Rs.6.225 crore together with interest accrued thereon from dt.1.4.2008 till the date of actual conversion. Similarly both SIDBI & IDBI Bank have agreed to convert 50% each of minimum unpaid guaranteed dividend of Rs.25.48 crore to Share Capital. Pending approval of State Government U/S/4 (3) of SFCs (Amendment) Act, 2000 the said amount of Rs.31.72 crore is treated as Share Deposits on account of SIDBI and IDBI Bank. The position of share capital and loan in lieu of share capital is indicated in Table-7 TABLE -7 Rs. Crore Particulars - Share capital As at 31.03.2011 As at 31.03.2012 Issued - Ordinary 421.00 421.00 - Special 4.00 4.00 Total 425.00 425.00 Subscribed and paid-up - Fully allotted (Ordinary) 378.76 378.76 - Fully allotted (Special) 3.00 3.00 - Share deposit pending for allotment 31.72 33.58 Grand Total: 413.48 415.34 RESOURCE MANAGEMENT The details of resource mobilization during the year is indicated in Table -8. TABLE -8 Rs. crore. Particulars 2010-11 2011-12 Increase in paid-up capital pending allotment - State Govt. - - - SIDBI/IDBI Bank 31.70 1.87 Sub-total 31.70 1.87 Refinance - SIDBI 0.53 - Sub-total 0.53 - Bonds - - Recovery (Net) 42.03 36.55 Others 6.51 - Total 80.79 38.42 The overall sources and uses of funds during the year are given in Table-9. TABLE -9 Rs. Crore Sources 2011-12 Uses 2011-12 Opening Cash/Bank 23.64 Disbursement 0.84 SIDBI refinance - SIDBI repayment (Prin.) 7.50 C.I.S. 0.97 C.I.S. 0.86 Recovery 36.55 Int. & Other charges paid 5.67 Admn. & Personnel Exp. 15.39 Other Income 2.10 Redemption of Deposit & Bonds Other Receipts 0.80 Funded Interest loan to SIDBI 3.72 Others (NEF& service charges 0.48 paid to SIDBI) Other cash out go 4.14 Closing balance 25.46 Total 64.06 Total 64.06 CLASSIFICATION OF ASSETS & PROVISIONING THERE OF The assets classification and provisioning thereof is made as follows: (Rs. Crore) Asset Outstanding Rate of Category Loans Provisions As on As on Current Previous 31.03.12 31.03.11 Year year Standard Direct Loan 2.28 2.24 0.25% 0.25% Personal Loan 0.40 0.54 0.40% 2% Vehicle & Housing Loan 0.49 0.62 0.40% 0.40% Total : 3.17 3.40 - - NPA Sub Standard 0.40 0.35 15% 10% Doubtful - I 0.98 1.79 25% 20% Doubtful - II 146.05 139.51 40% 30% Doubtful - III 30.88 43.50 100% 100% Loss 120.72 138.22 100% 100% Total (NPA) 299.03 323.37 - - Grand Total 302.20 326.77 - - (Rs. Crore) Asset Provision (Loan) Net Assets Category (Loan) Outstanding As on As on As on As on 31.03.12 31.03.11 31.03.12 31.03.11 Standard Direct Loan 0.006 0.006 - - Personal Loan 0.002 0.011 - - Vehicle & Housing Loan 0.002 0.002 - - Total : 0.010 0.019 3.17 3.40 NPA Sub Standard 0.06 0.04 0.34 0.31 Doubtful - I 0.25 0.36 0.73 1.43 Doubtful - II 58.42 41.85 87.63 97.66 Doubtful - III 30.88 43.50 - - Loss 120.72 138.22 - - Total (NPA) 210.33 223.97 88.70 99.40 Grand Total 210.34 223.99 91.87 102.80 * Standard Assets as on 31.03.12 includes Rs.0.40 cr. personal loan and Rs.0.49 crore vehicle & housing loan to employees. * Loan outstanding and Net Assets as on 31.03.12 includes Principal + Other Charges. * As per RBI/SIDBI norms, no netting is required for provision for standard assets. Provisioning has been made in conformity with prudential requirement. There is 12.66% decrease in loss assets (decreased from Rs.138.22 crore as on 31.03.11 to Rs.120.72 crore as on 31.03.12) and 3.73% decrease in doubtful assets (decreased from Rs.184.80 crore as on 31.03.11 to Rs.177.91 crore as on 31.03.12). Due to recovery of loans, the standard assets have decreased by 7.65%. On the other hand substandard assets increased to the extent of 14.29% due to re-classification of assets as on 31.03.12 basing on Recovery & Accounts position. Total requirement for provisioning as on 31.03.2012 has been assessed & estimated at Rs.210.34 crore. PENDING ISSUES OF RESTRUCTURING The financial and organizational restructuring of the Corporation which was approved by the State Cabinet during December 2006 & February 2009 is nearing completion. However, the following pending issues are yet to be addressed. State Government Approval of State Government Under Section-4(2) and 4(3) of SFCs Amendment Act, 2000 for allotment of ordinary shares in favour of SIDBI and IDBI Bank on account of: (a) Conversion of loan in-lieu of Share Capital (LISC) of Rs.6.225 crore + Interest from 01.04.2008 till the date of actual conversion to ordinary Share Capital. (b) Conversion of unpaid dividend of Rs.25.48 crore to ordinary Share Capital (50% each in favour of IDBI and SIDBI). SIDBI * Waiver of interest by SIDBI on LISC amounting to Rs.7.42 crore (from inception to 31.01.08) and waiver of funded interest. However as per advice of SIDBI, IDBI has been moved and the response is awaited. * Support from SIDBI to assist capacity building project of OSFC as per need. FINANCIAL POSITION ON RESTRUCTURING * In the process, on implementation of the relief and concessions from all the Stakeholders including financial support from the State Government in particular and consistent effort of the employees for recovery of dues, the Net-worth of the Corporation has improved from (-)Rs.282.41 crore to Rs.18.91 crore and Capital Adequacy Ratio (CRAR) from (-)94.23% to 9.50% within FY 2004-05 & FY 2011-12. EMERGING ISSUES, PRESENT LIQUIDITY PROBLEM AND STEPS INITIATED TO OVERCOME IT Issues with Small Industries Development Bank of India (SIDBI) * OSFC has paid interest dues to SIDBI till December 2011 and paying its dues regularly on account of newly availed line of credit. * The Corporation after continuous repayment of installments towards rephased dues and funded interest to SIDBI since May 2005 failed to pay the same from November 2011. * Consequently, following discussion with ED, SIDBI on 20.01.2012 and as per decision taken in a review meeting held on 20.01.12 under the Chairmanship of Honble Minister, Finance & P.E Department and as decided by Board of OSFC, a proposal for OTS of Refinance Outstanding (RFS) & NEF Soft Loan at Rs.45.00 crore was submitted to SIDBI on 21.03.2012. * Also, SIDBI has been requested to release the refinance (New LoC) against already disbursed new cases under TRA mechanism for Rs.99.09 lakh and continue to provide refinance support in future. * The revised OTS proposal of OSFC as submitted vide letter dt. 24.05.2012 is under active consideration of SIDBI. Issue with the State Government Refund of Rs.23.16 crore to be utilized as working fund by OSFC, which was paid by the Corporation in advance towards loans for settlement of SLR Bonds but subsequently such loans were entirely converted to ordinary Share Capital. The State Government has been moved to reconsider the proposal of refunding Rs.23.16 crore which is badly needed by the Corporation in order to continue with its lending activity in the absence of refinance support from SIDBI. Appointment of Consultant In the 365th meeting of the Board of Directors held on 29.12.2011, it was decided to move the State Government, P.E Department for appointment of a suitable consultant on high priority for making a viability study as per the present mandate and future role of Orissa State Financial Corporation. In response to the request, Government has appointed M/s. Delloite Touche Tohmatsu as Consultant. A preliminary discussion with the consultant was held on 30.03.2012. INSPECTION BY SIDBI SIDBI in terms of the provisions of Subsection (1) of Section 37A of SFCs Act, 1951 had conducted inspection of the Corporation for the FY 2010-11 during November-December 2011. The summary observations / suggestions / recommendations made by SIDBI and compliance thereof is being placed to the ensuing Board Meeting. COMMITTEES The Committee approach for decision making is continuing for ensuring efficiency and transparency in the working system. Committees set up for various purposes functioned well during the year. For better governance, the Corporation de-centralized the process of decision making with an appropriate delegation of power to Committees namely Executive Committee (EC), Default-Cum-Disposal Advisory Committee (DDAC), MD Committee & One Time Settlement Advisory Committee (OTSAC). Three internal committees namely Finance Committee, Recovery Committee & HR Committees are functioning to examine various issues of significant importance including policy matters and recommend course of action prior to obtaining approval from the competent authority. INFORMATION TECHNOLOGY With focus on future, the Corporation rescued its Information Technology System from the brink of obsolescence by deploying state-of-the-art computer equipments in all of its offices. By this way the Corporation has built up a platform of appropriate IT infrastructure commensurate with its business resisting the temptation of acquiring inappropriate technology in a mad rush for advanced technology. The Corporation has realized that the Information Technology is a means to an end and not an end in itself and it provides enormous possibilities to serve the customer better. But, unless the employees are acquainted to handle the equipments, the potential of the Information Technology can never be realized. Therefore, the Computer Services Department organized several workshops in missionary zeal to refresh the knowledge and skill of employees to handle the newly acquired technology. Further, to keep pace with the rapid development in Information Technology requiring constant update of knowledge and skill of employees, the Computer Services Department is providing On Demand Training in every working day after office hours to any employee who is interested to acquire any knowledge and skill in IT to wipe out computer illiteracy from the Corporation. Another priority of the Corporation was to make the Information Technology customer centric. Accordingly, the e-despatch system has been strengthened by more emphasis on e-mail then snail-mail. Now, the Corporation is utilizing the amazing power of Information Technology to bridge the physical distance of the Branch Offices by digital distance. Thus, the Corporation has joined the race of financial services organizations for serving customer better by bringing synergy out of employees skipping time and space utilizing Information Technology. HUMAN RESOURCE MANAGEMENT The most valuable resource of any organization is the human resource. The HR Department deals with formulating strategy to upgrade the skills of the existing manpower and to utilize the human resource with their optimum potentiality. It not only gives emphasis on skill development, the department is equally concern for the welfare of its employees vis-a-vis initiatives and motivation. The initiative of the employees coupled with dedication and commitment in discharging their duties have smoothened the functioning of the organization and improve its image. The area of expertise in Human Resource covers all spheres of activities like business administration, engineering, finance management, risk management, NPA management etc. The Corporation has staff strength of 253 with a composition of 82 Officers under A Class, 137 ministerial and supervisory staff under B Class and 34 subordinate staffs under C Class as on 31.03.2012. Out of 82 Officers, 8 Officers consisting of P.S & P.A are from non-functional area. Other Officers are having professional qualification which includes C.A, ICWA, MBA, PGDMA, PGDBM, PGDTL, Engineering Graduates, Legal Professionals, Post Graduation qualification. Two officers are under deputation to other organization. The average age of employees is 53 years. During the year, 39 employees have retired from Corporation service through VRS/ VSS/Resignation/Superannuation. The 28 vacant posts arising out of VRS/VSS have been abolished. TRAINING During FY 2011-12, HR Department has given more focus on knowledge management practice by identifying different areas for training. A motivational training programme was arranged for 45 employees at its corporate office to improve the morale of the employees. Besides this, 91 officers have been imparted with training in different phases on risk management, project appraisal, NPA management, computer and credit appraisal and rating tools (CART). CORPORATE SOCIAL RESPONSIBILITY(CSR) During the year, the Corporation has contributed Rs.1.00 lakh to the Chief Ministers Relief Fund for the Flood victims of the State. To promote and preserve odiya literature and culture, the Corporation has provided financial assistance to the odiya magazines, souvenirs through advertisements. Besides this, the Corporation has imparted summer internship training programme to MBA, MFC students of reputed institutions to motivate young entrepreneurship in the State. STAFF ACCOUNTABILITY POLICY (SAP) In order to develop accountability in the Corporation and to increase the sense of responsibility among the employees while discharging their various official assignments, the Corporation has already adopted Staff Accountability Policy (SAP). This was done with a view to acquaint the employees with various operational circulars, guidelines and delegation of power from time to time. The policy on Staff Accountability covered both credit and non-credit functions of the Corporation. The Credit functions include assistance by way of loans and advances, line of credit, refinance, grant/subsidy, non-conformity to credit manuals or violation of guidelines and procedures and equity finance etc. The Staff of the Corporation are accountable for action / inaction leading to loss to the Corporation in credit functions as well as non-adherence to the guideline and procedure in non-credit functions such as purchase and procurement of stores and stationery, Computer Soft-ware/ hard-ware peripheral, premises matter. The Internal Control and monitoring mechanism has been strengthened by the introduction of Staff Accountability Policy. REORGANISATION OF BRANCHES & DEPARTMENTS Reorganisation of different departments of the Corporation was made during the FY 2011-12 with a view to give more focus on lending operation and monitoring and management of NPAs. A separate department namely Administration & Premises Department (APD) has been created to look after the internal administration/office management/ campus management and logistic support to different departments for smooth operation. Number of Branch Offices was reduced from 17 to 15 after merger of Rayagada & Baragarh Branch with Sambalpur & Jeypore Branch respectively. The number of Branch Offices as on 31.03.2012 ,stood at 15 and Facilitation-cum-Recovery Centres (FRCs) at 6. However, the Corporation will continue its renewed effort and endeavor for the growth of MSME in the State through its existing Branch network. GRIEVANCE REDRESSAL CELL In order to expedite quick redressal of the grievance petitions/representations received from the customers/entrepreneurs, a Grievance Cell at the Corporate Office is functioning. Since most of the grievances relates to recovery measures of the Corporation, the same were handled by the concerned Department with approval of MD/Board. During the year, the cell has disposed all the cases including the cases of previous year. Besides, the Cell is taking prompt action with regard to redressal of grievances published in various Newspapers relating to activities of the Corporation. INTERNAL VIGILANCE CELL Internal Vigilance Department headed by Deputy General Manager as Chief Vigilance Officer (CVO) is in operation at Head Office to function as the coordinator/ facilitator in between State Vigilance Department and the Corporation. The department deals with the grievances and complaints of the entrepreneurs and public at large for ensuring observance of rules and guidelines as prescribed by the Corporation from time to time. The department has been able to convey a positive message in the public by attending genuine complaints promptly and focused much on preventive vigilance. The department has identified corruption prone areas in the organisation to keep proper vigil on the functioning of various activities. During the year, no fresh vigilance case has been registered by the State Vigilance and no such serious complaints/irregularities against any officials have been noticed. The activities of this department will pave the way for functioning of the Corporation as transparent as possible. RIGHT TO INFORMATION ACT CELL The Corporation, following the operational guidelines of Orissa Right to Information Rules, 2005, has implemented Right to Information Act 2005. In accordance to the said Act & Rules, the Corporation has appointed Public Information Officer, Asst. Public Information Officer and Appellate Authority at its Head Office. In addition, one Public Information Officer and one Appellate Authority for each Branch Offices has also been appointed to enable the Citizens to secure access to information available with the Organization. With a view to promote transparency and accountability, necessary and relevant information for public has been placed in the website of the Corporation, which is being up-dated at regular intervals. Names of the Appellate Authority, Public Information Officer and Asst. Public Information Officer stationed at Head Office, Public Information Officers and Appellate Authority stationed at 15 Branch offices have been notified. The position of receipt and disposal of the RTI applications during the year is given below: 1 No. of pending applications at the beginning of the year 07 2 No. of applications received during the year 124 3 No. of applications disposed during the year 120 4 No. of applications pending for disposal at the end of the year 11 All the appeals received during the year have been disposed off within the stipulated period.